Aussie dollar too high, says strategist

Evan Schwarten

The Australian dollar is overvalued by as much as 10 US cents and is likely to stay that way for the next couple of years.

Since it was first floated in 1983, the Australian dollar's fate has been closely linked to commodity prices.

When the price of goods like iron ore, copper and coal go up, so does the Aussie dollar.

When they go down, it goes down as well.

Advertisement

That still happens, according to ANZ foreign exchange strategist Andrew Salter, but the Aussie dollar has jumped to a higher level recently largely as a result of foreign central banks buying the currency.

He says the dollar, currently worth more than 103 US cents, is overvalued to the tune of about 10 US cents.

"I actually think the fair value of the Aussie dollar is somewhere between 90 and 95 US cents, based on commodity prices and interest rate differentials," he said.

The dollar has fallen from its high point of more than 108 US cents earlier this year, but has remained stubbornly above the 100 US cent mark.

That's despite commodity prices falling more than 19 per cent in the past year, according to the Reserve Bank of Australia (RBA).

At the same time, the RBA has cut its cash rate (currently at 3.25 per cent) by 1.5 percentage points since November 2011, which should push the Aussie dollar lower because it makes it less attractive for foreign investors to deposit their money here.

Mr Salter says one thing inflating the value of the currency is demand from international central banks - the RBA's foreign equivalents - and sovereign wealth funds.

Central banks are not typically risk takers, they put their money where they think they can get safe and reliable returns and typically that has meant places like the US, Japan, the UK and Europe.

But those economies are either in recession or struggling to gain traction, forcing central banks to look further afield.

"They want to get rid of their US dollars, they want to get rid of their yen, their euro and their pounds and they want to invest it in other markets," he said.

"Australia is one of those but so are markets like New Zealand, Taiwan, Korea and the Scandinavian countries."

Mr Salter says the current state of affairs is part of a de-leveraging cycle; governments, households and banks in many developed economies are paying back the huge amounts of debt amassed prior to the global financial crisis.

"To do this they are spending less elsewhere so returns in the economy in general are low," he said.

And he warns the current cycle could last many more years, possibly even decades and while it continues it is likely to keep the Aussie dollar higher.